1. When Unpaid Payroll Taxes Can Create Personal Liability
Under Internal Revenue Code § 6672, the IRS may assess the Trust Fund Recovery Penalty, or TFRP, against a responsible person who willfully fails to collect or pay over covered taxes. This federal rule can create personal exposure even while the company remains open. In a business tax dispute over withholding, examine the company's debt and the officer's conduct separately.
Responsibility and Willfulness Are Separate Requirements
Responsibility concerns the duty and authority to direct collection, accounting, or payment of trust fund taxes. Willfulness concerns the person's knowledge and conduct concerning nonpayment. Title alone does not establish liability. Several people may share financial control, but each person's role requires separate review for the relevant periods.
The Trust Fund Portion Differs from the Total Payroll Tax Debt
For employment taxes, the TFRP generally equals unpaid federal income tax withholding plus the employee share of Social Security and Medicare taxes. It excludes the employer share of these taxes and the company's late-payment or deposit penalties. Compare the proposed assessment with payroll returns, deposits, and payment credits for each period. “100 percent penalty” refers to the unpaid trust fund amount, not an automatic doubling.
2. How the IRS Evaluates Control over Company Funds
The IRS examines who could approve payments and choose creditors. Daily practices may differ from job descriptions or bank permissions. Compare formal authority with practical restrictions on the officer's control.
Authority to Choose Creditors and Approve Payments
Relevant questions include whether the officer could authorize tax deposits, redirect available funds, or change payment priorities. Ownership, hiring authority, and involvement in financial management may also matter. The records below help distinguish account access from decision-making authority.
| Record | What It May Show |
|---|---|
| Bank permissions and payment approvals | Access to funds and authority to authorize transfers |
| Creditor payment instructions | Who selected payments and established priorities |
| Payroll reports and deposit confirmations | Withholding amounts and whether deposits occurred |
| Internal emails and meeting records | Knowledge of unpaid taxes and responses to warnings |
Bank permissions and payment approvals
- What It May ShowAccess to funds and authority to authorize transfers
Creditor payment instructions
- What It May ShowWho selected payments and established priorities
Payroll reports and deposit confirmations
- What It May ShowWithholding amounts and whether deposits occurred
Internal emails and meeting records
- What It May ShowKnowledge of unpaid taxes and responses to warnings
Signing Checks Versus Following Payment Instructions
Processing payments under a superior's instructions differs from independently choosing creditors. Check-signing authority alone does not settle responsibility. Conversely, delegating payroll tax compliance to a bookkeeper or outside provider does not automatically eliminate responsibility. Examine the officer's retained authority over tax payments.
3. Why Knowledge of Unpaid Taxes and Later Payments Matter
Willfulness does not require an improper personal benefit or an evil motive. Knowing nonpayment, and in appropriate circumstances reckless disregard of whether taxes are being paid, can support the requirement. Trace warnings and spending decisions. A cash shortage alone does not excuse nonpayment.
Establish When the Officer Learned of the Delinquency
Identify when the officer first knew about missed deposits, which may predate the first IRS letter. Payroll reports, accountant warnings, rejected transfers, and internal discussions may establish an earlier date. Preserve records and separate known facts from assumptions. Changes in duties or access should also appear in the timeline, particularly when the officer joined or left during the periods under review.
Review Available Funds and Payments to Other Creditors
Paying suppliers, rent, or other creditors after learning that trust fund taxes remain unpaid may support a finding of willfulness. A desire to keep the company operating does not itself excuse that choice. Review account balances, incoming receipts, payment instructions, and any restrictions on using the funds. Identify available money and who controlled it.
4. Responding to an IRS Personal Liability Investigation
A TFRP investigation focuses on individual responsibility and conduct, unlike a business tax audit examining income or deductions. Company collection negotiations differ from an officer's challenge to personal liability. An interview request, proposed assessment, and payment demand require different responses.
Prepare for a Responsible Person Interview
The IRS often records responsibility-related interviews on Form 4180. Before the interview, compare your recollection with bank records, payroll responsibilities, and the timeline of missed payments. Describe your own authority accurately and avoid guessing about another person's decisions. Review the recorded answers for accuracy before signing. The company's attorney does not automatically represent the officer personally.
Review Letter 1153 and the Appeal Deadline
Letter 1153 proposes a personal TFRP assessment. The IRS generally allows 60 days from the letter's date to appeal, or 75 days if it is addressed outside the United States. Follow its instructions and send the protest to the identified IRS employee rather than directly to Appeals. Do not substitute the usual income-tax deficiency petition deadline. Form 2751 concerns agreement to the proposed assessment and warrants review before signing.
Support the Protest with Duties, Dates, and Records
Explain which periods, amounts, or findings you dispute, then connect each objection to supporting records. Evidence of limited authority addresses a different issue from evidence concerning knowledge or later payments. A business tax attorney can address these issues separately from a general IRS audit. If an interview or appeal deadline is approaching, bring the IRS correspondence, payroll records, and payment-authority documents for review before responding.
30 Oct, 2026
